Advantage to file for bankruptcy as Hertz cuts car supply

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(Reuters) - Advantage Rent A Car, which Hertz Global Holdings Inc (HTZ.N) hived off as part of a deal to buy Dollar Thrifty, will file for bankruptcy after Hertz terminated lease agreements that provided Advantage with its cars.

A Hertz sign is seen outside a rental car office in Ferndale, Michigan May 9, 2011. REUTERS/Rebecca Cook

Shares of Hertz fell as much as 17 percent after Advantage’s owners said the book value of the cars passed to them at the time of the sale last year was too high.

Hertz terminated lease agreements on 24,000 Advantage vehicles on Saturday, saying Advantage’s owners had failed to make some payments.

Hertz sold Advantage to Franchise Services of North America (FSNA) FSN.V last year to satisfy antitrust authorities, as the brand competes with Dollar Thrifty in low-cost car rentals.

Simply Wheelz LLC, a unit of FSNA that does business as Advantage Rent A Car, leased its vehicles from Hertz as part of the deal.

FSNA said Simply Wheelz recorded a loss of about $8.6 million on the vehicles it sold from the fleet since June, a “significant difference” from the book value stated by Hertz.

The master lease agreement required Simply Wheelz to bear the residual value risk of the leased fleet, according to FSNA. Residual value shows how much an equipment is worth at the end of its lease, or at the end of its useful life.

Given the difference in value, FSNA said it requested Hertz to provide information to determine the calculation of the net book value of the leased fleet.

“Despite repeated requests, Hertz has not yet provided the company with such information notwithstanding the view of the company that Hertz is contractually obligated to do so,” FSNA said in a statement.

Without access to this information, FSNA said it was unable to accurately quantify the potential loss it would experience as a result of its disposition of the fleet it leased from Hertz.

Hertz, which reported a better-than-expected third-quarter profit on Tuesday, said FSNA’s allegations were without merit.

SELLING ADVANTAGE

FSNA said that it has been in talks with three other parties, besides Hertz, for the sale of the Advantage car rental business and to obtain additional financing.

Hertz offered to provide interim financing to complete a sale under a proposed insolvency of Simply Wheelz, a move rejected by FSNA as it believes it could fetch a higher price at a broader auction.

FSNA said it determined that the proposal could have resulted in Hertz being the eventual buyer of the Advantage business, which the U.S. Federal Trade Commission was unlikely to approve.

FSNA, which also owns the U-Save and Canada’s Rent-a-Wreck brands, said it would file for Chapter 11 bankruptcy protection for Advantage as early as Tuesday.

Hertz said its total exposure to FSNA’s liquidity issues was between $50 million and $70 million, of which $44 million has already been accounted for through an impairment charge and a reserve.

Advantage operates in 33 states, including airport locations serving 60 of the top 70 airports across the United States.

Hertz shares were down 15 percent at $20.08 in noon trading on the New York Stock Exchange. FSNA shares were trading down 37 percent at 7.5 Canadian cents on the Toronto Venture Exchange.

Reporting by Sagarika Jaisinghani and Sakthi Prasad in Bangalore; Editing by Supriya Kurane and Sriraj Kalluvila